That is not to say that I think Microsoft should walk away. It should not, as I argued two weeks ago in a post titled “A Deal Must Be Done.”

As I wrote: “Because, if [Microsoft CEO Steve] Ballmer is serious about his contention, which he made fervently onstage at D6, that the software giant keeps ‘coming and coming and coming,’ it simply cannot make that attack from a piddling 9% market share in the online search business.”

No, indeed, and that’s why it should watch carefully as the price of Yahoo’s stock drops and what happens between Yahoo and billionaire activist investor Carl Icahn.

Icahn is waging a proxy war against Yahoo, which should come to a head at the company’s board meeting on Aug. 1.

So if Ballmer is serious about competing strongly in the search-ad market, he must keep Yahoo in mind, no matter the checkered history of their dealings so far.

And even, as several sources tell me, swallow the bile it must have had after Microsoft thought it won the search deal with Yahoo, at least until a June 8th meeting in which Yahoo offered the whole company or nothing.

Yahoo then turned around and signed with Microsoft archrival Google (GOOG) last week.

“They were uncorking the champagne last week on the Yahoo search deal and then it all went sideways to Google,” said one source. “Someone’s head will roll.”

The big head here, of course, is Platforms and Services Division President Kevin Johnson (pictured here), one of the big proponents of the various deals with Yahoo.

Now, he and others at Microsoft have to be scrambling for alternative schemes to figure out a way to stay in the game.

While some think Microsoft should stick more to its knitting and buy enterprise companies like SAP, Ballmer and Johnson have been adamant that online ads will be its next great business.

And, given the growth there, being No. 2 in the space is not the worst place to be.

In any case, many expect a bold step from Microsoft in the space now.

The obvious move is a splashy bid for Facebook. As before, Microsoft continues to send subtle signals of interest, now via third parties, to the social-networking site.

Not so fast, though.

As much as many at Facebook would like the sell out for a price tag in the $10 billion to $15 billion range, CEO and Founder Mark Zuckerberg remains uninterested and seems willing to continue resisting the pressure (see BoomTown’s take on that here).

As for AOL–it’s a more likely scenario, given it would allow Microsoft to double down in the display space with the Time Warner (TWX) division’s Platform A ad unit and also gain some other strong properties (such as in video search with Truveo, with widgetmaker Userplane, as well as in instant messaging).

It would also probably like to give the boot to Google, which now serves up AOL search ads (and which also holds a 5% stake in AOL).

Microsoft has been very close to buying AOL before, once even considering spinning its Internet properties and AOL into a newco, so it does know the lay of the land there.

And Time Warner CEO Jeff Bewkes is casting about for solutions to unlocking the value of the interactive unit, which has always needed to run free from the mother ship.

In fact, here’s some video highlights of my interview with Bewkes at our recent D: All Things Digital conference, in fact, where he discusses AOL’s challenges:

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